Capital Allocation Trends At Xi'an ChenXi Aviation Technology (SZSE:300581) Aren't Ideal

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Xi'an ChenXi Aviation Technology (SZSE:300581) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Xi'an ChenXi Aviation Technology:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.0076 = CN¥7.6m ÷ (CN¥1.2b - CN¥198m) (Based on the trailing twelve months to September 2024).

Therefore, Xi'an ChenXi Aviation Technology has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 5.5%.

View our latest analysis for Xi'an ChenXi Aviation Technology

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xi'an ChenXi Aviation Technology's ROCE against it's prior returns. If you'd like to look at how Xi'an ChenXi Aviation Technology has performed in the past in other metrics, you can view this free graph of Xi'an ChenXi Aviation Technology's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Xi'an ChenXi Aviation Technology's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 4.0% over the last five years. However it looks like Xi'an ChenXi Aviation Technology might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Xi'an ChenXi Aviation Technology is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 98% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Xi'an ChenXi Aviation Technology, we've spotted 2 warning signs, and 1 of them shouldn't be ignored.

While Xi'an ChenXi Aviation Technology isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.